One of the biggest retailers just shared huge news. It is issuing a special $15 dividend for shareholders. This is certainly a welcome turn of events for Costco Wholesale (COST 1.01%) investors, representing about a 2% dividend yield at the current stock price. But what should investors do with this handsome payout? Well, you've got a couple of options. Let's consider them.
Reinvesting has been a genius strategy
The main decision investors have to make with a dividend payout is whether to pocket the cash or reinvest it in the company. By pocketing it, you're looking to deploy it to another investment or maybe spend it. Regardless, if you don't reinvest it now, you likely won't use it to buy Costco shares later.
But buying Costco shares with its special dividend has been a winning strategy. This isn't the first, and likely won't be the last time Costco has issued a special dividend. Costco issued special dividends in 2012 ($7), 2015 ($5), 2017 ($7), 2020 ($10), and now $15 in 2023.
So what would have happened to your money had you reinvested your dividend in Costco versus the market for these payouts?
| Dividend Year | Payout | Today's Value if Invested in Costco | Today's Value if Invested in the S&P 500 |
|---|---|---|---|
| 2012 | $7 | $56.62 | $28.16 |
| 2015 | $5 | $25.95 | $13.21 |
| 2017 | $7 | $28.13 | $15.36 |
| 2020 | $10 | $17.95 | $13.51 |
Data source: YCharts.
As you can see, reinvesting the dividend into Costco stock has been a fantastic strategy. But even if you're not a Costco shareholder, you can still get in on the action. The special dividend's ex-dividend date is Dec. 27, 2023, meaning as long as you own shares at the close of the market that day, you will receive the dividend.
But that was just one part of Costco's earnings announcement; there's also Costco's earnings to consider.
Costco's stock is far from cheap
For the quarter ended Nov. 26, Costco's revenue rose 3.8%, which isn't anything spectacular. One reason for this small growth is that Costco is dealing with difficult year-over-year comparisons with big-ticket items (like laptops or TVs). These big-ticket sales were down 20% online and 17% in-store. Those are tough comparisons to deal with, but they will disappear in a few months once current consumer trends overlap.
Still, Costco's earnings per share (EPS) rose from $3.07 to $3.58 -- a 17% rise. That's market-beating growth, which makes Costco a worthwhile investment.
One thing many investors are worried about right now is Costco's premium valuation. At 48 times trailing and 43 times forward earnings, Costco is one of the more expensive stocks in the market.
COST P/E Ratio data by YCharts.
However, one factor that should make its valuation decline is an announcement of a membership fee raise. It's unknown when Costco will do this, but management has stated that it's coming. This will be a massive earnings boost as its membership fees are pure profit.
So, should investors buy Costco shares right now? I'd say there hasn't been a bad time to buy Costco shares in its history. While the stock is far from cheap, that hasn't stopped it from being a long-term market beater. As a result, I think investors are still OK with establishing a position or reinvesting their dividends into Costco shares.
